May 14 (Bloomberg) -- Ukraine urged Russia to condemn
separatists in its eastern regions after seven government troops
died in an ambush in a signal that the ex-Soviet republic may be
sliding closer to outright civil war.

After weeks of skirmishes between government troops and
rebels in Ukraine’s eastern Luhansk and Donetsk regions, more
than 30 attackers struck a convoy yesterday near the city of
Kramatorsk, killing six paratroopers. One of the eight who were
wounded also died on the way to the hospital, Interfax reported.
Acting Defense Minister Mykhaylo Koval said Ukraine’s east was
embroiled in an “undeclared war with Russia.”

The ambush was the rebels’ deadliest attack against
Ukraine’s military since they began a campaign to secede after
Russia annexed Crimea in March. It followed a pact by activists
in Luhansk and Donetsk to join forces and signaled the conflict
is intensifying, said Dmitry Orlov, director general of the
Agency for Political and Economic Communications in Moscow.

“The violence in Ukraine is building into regular warfare
between militia and the Ukrainian armed forces, and that means
the threat of civil war is growing,” Orlov said by phone today.
“Even so, we can’t yet say that this threat is close to
becoming reality. It’s just a small part of Ukraine’s population
that supports these hostilities.”

Russia ‘Engaged’

The North Atlantic Treaty Organization says Russian
President Vladimir Putin is supporting the separatists with
special forces and intelligence agents. It says his government
has also failed to make good on a pledge to move about 40,000
troops back from Russia’s frontier with Ukraine, a country of 45
million people sharing borders with European Union and NATO
member states Poland, Slovakia, Hungary and Romania.

Ukrainian Prime Minister Arseniy Yatsenyuk urged Russia to
condemn the insurgent groups and do all it “can to stabilize
the situation.” The crisis has fueled the worst standoff
between Russia and its Cold War foes since the fall of the Iron
Curtain, with the U.S. and EU slapping sanctions on companies
and people close to President Vladimir Putin.

Economic Danger

The escalation ended a five-day rally in Russian stocks.
The Micex Index slid 0.1 percent to 1,383.66 at 2:26 p.m. in
Moscow. The ruble strengthened 0.4 percent to 34.6881 per
dollar, according to data compiled by Bloomberg. Ukraine’s
hryvnia was 0.8 percent weaker to the dollar, bringing its loss
to 31 percent since the start of the year.

The conflict could kill growth in the region, the European
Bank for Reconstruction and Development said today, slashing its
growth forecast for the 30 economies from Russia to Poland to an
average 1.3 percent this year, compared with a January
prediction of 2.8 percent.

With the prospect of increased sanctions, “Russia would
slip into recession and average growth in the region would grind
to a halt in 2014-15,” the EBRD said in a statement at its
annual shareholders’ meeting in Warsaw. It saw Ukraine’s economy
shrinking 7 percent this year.

Europe is trying to increase diplomatic efforts, with
German Foreign Minister Frank-Walter Steinmeier visiting Kiev
and Odessa yesterday in a bid to broker talks between the
central government and pro-Russian separatists.

Ukrainian Unity

Yatsenyuk and acting President Oleksandr Turchynov also
prepared to host a meeting today of lawmakers, regional state
administration heads, religious leaders, and former presidents
to find a way out of the crisis, Ukraine’s government said in a
statement on its website yesterday.

Representatives of the Organization for Security and
Cooperation in Europe will also attend. It’s unclear whether any
separatists will be present, as the government said it won’t
talk with gunmen and “terrorists.”

Russia will face new sanctions if Ukraine’s scheduled
presidential election on May 25 is disrupted, French President
Francois Hollande said yesterday in Tbilisi, Georgia, which
fought a war with Russia over a breakaway region in 2008.

Leaders from the Group of Seven rich nations’ club will
take the decision on deeper sanctions at their June 4-5 summit
in Brussels, according to a French official, who asked not to be
named because the deliberations are private.

Bond Sale

EU foreign ministers this week froze the assets of
companies for the first time in the conflict, including oil and
natural-gas producer Chernomorneftegaz, after they were
expropriated during Crimea’s annexation. They added 13 people to
a list of individuals facing asset freezes and travel bans for
destabilizing Ukraine and threatened more measures, along with
the U.S., to target entire Russian industries.

In Kiev, Ukrainian Finance Minister Oleksandr Shlapak said
the government will sell $1 billion of U.S.-backed bonds at a
yield of as much as 2.9 percent “in the near future” to help
shore up the government’s coffers.

“I’m sure we’ll get the U.S.-backed money before the
election,” Shlapak told Bloomberg in an interview.

‘Deep Crisis’

The EU will soon give Ukraine a first 600 million euros
($823 million) of a 1.6 billion euro aid package, European
Commission President Jose Manuel Barroso said yesterday.

The aid pledges followed an agreement by the self-styled
Donetsk People’s Republic and neighboring Luhansk to unite
yesterday, a day after they declared themselves sovereign
states. Donetsk said 90 percent of voters backed splitting from
Ukraine in a May 11 referendum that was rejected by the U.S. and
EU as illegitimate and marred by irregularities. Luhansk
reported a similar result.

Russia’s Foreign Ministry said yesterday that a
“reluctance of the Kiev authorities to engage in real dialogue
with the representatives of the regions” was an obstacle to de-escalation and said the referendum results showed the country
was in “deep crisis.”

Ukraine’s presidential election can’t be considered fully
legitimate because of the government’s military operation
Interfax reported, citing Russian State Duma Speaker Sergei
Naryshkin. He said not holding election would be even worse.

‘Undeclared War’

German Chancellor Angela Merkel said she was “not
interested” in the results of the referendums, which echo
events that preceded Russia’s annexation of the Black Sea
peninsula Crimea from Ukraine in March. The rebels have seized
administration buildings and television towers in at least 10
cities and towns in the country’s east.

“In our eastern regions we have an undeclared war,” Koval
told reporters in Kiev yesterday. “Our neighboring country
unleashed the war, sending special forces and saboteurs into our
territory.”

A majority of Ukrainians, or 56 percent, believe their
country is at war with Russia, according to a poll by the Kiev-based Razumkov Center. About 53 percent want to join the
European Union -- ousted President Viktor Yanukovych’s refusal
to sign an EU association agreement triggered the crisis --
whereas two-thirds see Russia as “brotherly” and “friendly,”
according to the April 25-29 poll of 2,012 people.